Discussion and Analysis by Charles Porter:
The overwhelming dynamic of the week thus far has been one of relative tranquillity within Foreign Exchange markets. However, today’s events bring the propensity to blow this perception out of the water by providing considerable volatility to markets. Sterling has opened mildly stronger having faced headwinds during yesterday’s session. A Brexit press conference between David Davis and Michel Barnier is due later today, detailing the progress achieved within this round of negotiations. The all-important Irish border is being signposted to have created an issue during this round.
Sterling Briefing: Brexit Means…?
Brexit means… Brexit? Breakfast? Following the referendum on 23rd June 2016, the public have been told of a Black and White Brexit; a Red, White and Blue Brexit; a hard Brexit; a soft Brexit. Well, this morning, the Liberal Democrat vision of a no-Brexit has gained momentum.
One of the authors of the Lisbon treaty’s Article 50, Lord Kerr, is expected to advocate that there is a legal basis for the retraction of Britain’s notification of withdrawal. Speaking in London today, John Kerr will stand in contrast to the government’s headline negotiating stance: no deal is better than a bad deal. What will be important for Sterling markets is the disharmony that this testimony may create within May’s deeply divided Cabinet.
The headline within the Financial Times this morning suggests that PM Theresa May could be willing to offer more than the €20bn payment that was implied by her Florence Speech. Hardline Brexiteers within her own party are said to be more willing to pay a higher price for a better deal, relieving a constraint upon May’s cabinet.
The Catalan referendum only a short while ago provided panic to markets. The Euro insulated itself considerably from the trouble in virtue of being the face of a currency union, and therefore not feeling the traditional idiosyncrasies of national currencies. However, Spanish and Catalonian debt markets, both corporate and private, were brought into a state of disarray alongside Catalonian private entities.
Following the referendum and declaration of intent, political risk soared within Spain. As Madrid and Prime Minister Mariano Rajoy waded into the independence bid, the status of Catalonia’s autonomy from the capital was threatened. However, at present, markets appears to have forgotten the crisis that unfolded in Spain. Whilst momentum appeared to sway back and forth within the Catalonian electorate, with immense rallies for both sides of the campaign seemingly out-doing the other, tension must still exist.
The tension that still underlies the region and its relationship with the rest of Spain should not be forgotten so easily, particularly with the daily reminder of Brexit. Markets could soon underprice the political risk within Spain and the wider Eurozone, and those exposed to forex markets would be well advised to remember this risk.
Yesterday afternoon, markets appeared to price in a risk to Trump’s pro-Business Tax reform. The Trump Presidency, beginning even from his election, has provided a tailwind to the US Dollar. With the Bill now in the Senate and facing significant challenges and manipulation, the US Dollar has come under pressure. Losing ground to the Euro most days this week, markets appear to be testing recent Euro weakness.
The Days Ahead:
Trade balance, industrial, manufacturing and construction data is out later this morning. Containing the propensity to provide mild support to the Pound, Sterling markets will look here before attempting to gleam any information from the interaction between Barnier and Davis. With inflation data out next week, we look ahead to the weekend.